Greggs' vow over its expansion plans despite slower sales growth

The pasty and sausage roll maker saw a 0.2 per cent increase in third quarter like-for-like sales, down from 0.7 per cent growth in the first half.

Greggs, which operates from 1,451 stores across the country, pledged to continue its expansion programme, which includes ambitious targets for 60 new stores in Yorkshire, creating 600 jobs.

It has opened a net 32 new stores so far this year, adding shops in Sheffield, Halifax, Leeds and Hull to give it around 150 in Yorkshire.

The group plans to have opened about 60 stores nationally by the end of 2010, and will have refurbished another 120.

Greggs' expansion plans will enable it to maintain total sales growth even though like-for-like growth continues to slide. It expects sales at stores open for more than a year to be broadly flat in the final quarter.

"I don't believe we're going to see an easing in tough trading conditions," said chief executive Ken McMeikan. "I believe the UK consumer is still trying to manage their finances very sensibly and carefully."

He expects this tough climate to play into Greggs' hands, and it continues to launch keenly-priced products.

In February Greggs launched breakfast rolls – stuffed with bacon or sausage – plus a coffee, for 1.99.

It has now sold seven million breakfast rolls, making them its best-selling sandwich.

"I'm not sure any business can describe itself as recession-proof," said Mr McMeikan. "We are working hard to ensure that if times are tough and money is hard to come by... that we give you every reason to come to Greggs to spend that money.

"We've got a really strong reputation for value."

He said the group continues to target customers with local favourites to maximise sales. After rolling out croissants and pain au chocolat in its London stores, it is now introducing these continental lines at all its stores.

Porridge will also be rolled out at 750 shops in coming weeks, as the group increases its focus on the lucrative breakfast market.

Greggs has 53 per cent of its stores in the north and 47 per cent in the south, but sees "significant growth opportunities" in the south and south west.

It has submitted a planning application for a new bakery in Wiltshire to help capture this growth.

"In the south we want to make sure that we do what we have done very successfully (elsewhere)," said Mr McMeikan.

"As well as having a national range we are really great at tailoring our products so that we get the regional and local favourites."

Along with other food producers, Greggs faces the combined pressures of rising commodity prices and constrained consumer spending.

The group has bought its wheat requirement for up until the middle of 2011, to shield it from further rises in wheat prices.

"It's probably sensible with the way wheat prices are," said Mr McMeikan.

He added Greggs has also pushed through price increases of a few pence, which helped hide slipping volumes.

But Greggs is loathe to pass on increases in full, so has also gained savings from measures such as buying efficiencies and reduced hours in stores.

The cash-rich group contin-ues to fund its expansion through cash, and has around 24.6m.

Impressing the analysts

Analysts at UBS said Greggs' store improvement plans give good growth potential.

"We have been impressed by the changes Greggs has made this year, with better use of existing space from the enhanced breakfast offer and the refurbishment of 17 shops into the new 'concept' design.

"We believe the combination of accelerated new space growth and incremental innovation will drive the group forward, generating upside potential in the medium-term forecasts." They maintained a buy recommendation and said sales growth from the extra space created by the revamped stores could feed through in 2011 and 2012.

However, they downgraded the group's 2011 earnings forecast by three per cent because of the tough trading outlook.

Analysts at finnCap highlighted Greggs' cash position of 24.6m, which has also seen share buybacks of 5.8m this year. "(The) cash position remains strong," they said.

"Cost savings protect pre-tax profits forecasts."

"Although we will probably trim the revenue forecasts (of 668.9m), Greggs suggests that it will still be able to meet pre-tax profits expectations for the year," added analysts at the firm.

"We believe our numbers are below consensus already so there appears to be no need for further reduction.